The reappointment of Deepak Parekh as a Director at HDFC could not have been by a more laser thin margin. This, however, is not going to be an isolated instance, says Robin Banerjee. India Inc can easily prepare itself for more such episodes.

When HDFC Chairman speaks, India listens – be it the business community or the political fraternity. But when we woke up the other day and saw the newspaper and TV headlines squeaking that Deepak Parekh, the doyen of Indian private-sector banking was almost getting ousted from the very housing finance company’s Board which he nurtured for decades, it was a shocking news!

What happened to bring the scenario to such a pass? Parekh is 74 and was seeking re-appointment as a Director in HDFC Ltd. According to a provision in the company law (coming into force from 1st April 2019), Parekh needed to get three times votes in favour as those cast against, as he would be crossing the age of 75 during his ensuing board tenure.

Thus, the shareholder’s special resolution required 75.0% votes to be in favour of his appointment. Lo and behold, he got 75.14% - it could not have been more laser thin victory than this!

Why was Parekh targeted?

Who voted against Parekh? It is reported that that two global proxy advisory firms recommended for Deepak Parekh to be voted out. One was Institutional Shareholder Services Inc (ISS) and the other Glass Lewis. ISS recommended voting against Parekh's re-appointment as he “serves on a total of more than six public company boards”.

Glass Lewis' assessed that four of HDFC’s independent directors are “affiliated” or have served on the board for over 10 years, reducing the independence of the board to 20 percent, below the acceptable ratio of 50 percent.

Many shareholders including some major foreign funds, would have voted in accordance with these advisories. This is the result of shareholder activism.

World over, investor activism is on the rise with even established companies like Royal Dutch Shell and Deutsche Bank recently having faced opposition from their investors.

Boards of large Asian companies have been successfully opposed by minority investors, wielding their power in some of the most conservative business environments.

In May 2018, investors in Fortis Healthcare, India’s second-biggest hospital chain, teamed up to oust one of the company’s board members when poor governance was observed.

Around the same time, Hyundai Motor was forced to cancel a controversial $9 bln restructuring plan, which would have strengthened the control of the company’s founding family.

In UK, in an unprecedented move, the investors rejected Deloitte’s reappointment as auditors at building materials group SIG, which admitted overstating its profits in previous years.

Behind the scenes, clearly a new trend is emerging: investors, the world over are gently punishing directors over governance failures and concerns about their dedication to their job.

A 2017 McKinsey study says that for those who successfully follow activist thinking, the opportunity can be striking: top-quartile activist campaigns are associated with sustained excess shareholder returns of over 9 percent even three years after campaign.

Globally, activists like Nelson Peltz, Carl Icahn, and Bill Ackman, have become hallowed names in the financial markets, with mutual fund firms and investors tracking every move of these activists and buy stock in the companies they target.

However, not all investor activism leads to beneficial results. Some could be taking positions purely for own benefits.

Bill Ackman, for instance, took on Herbalife, the US nutritional supplements multi-level marketing company, campaigning since 2012 accusing the company of running a pyramid scheme.

In fact, Ackman was selling the stock short (an investment that makes money when the stock price falls) declaring his intention to drive the stock price to zero. Finally, he exited in March 2018 his $1 billion bet, not being able to prove that the firm had a fraudulent business structure.

Poor governance is no, no

When the Board and the management acting as trustees, practices asymmetrical treatment and benefits particular stakeholders especially the owners or owner-managers, it is poor corporate governance.

While pockets of shareholder activism help in highlighting probable wrong doings, but most corporates go scot-free.

Historical evidence shows that companies practicing poor governance have ultimately negated shareholder value. A group of well-informed investors should go a long way to stall unethical and inefficient management of many boards.

The concept of corporate democracy leads to a few elected representatives to run a corporation. But who chooses the representatives? Many a time it is the motley group of concentrated shareholders having quid-pro-quo relationships, helping each other to augment their respective cause. Keep a watch for these structures, and reposing faith in such companies is a bungle.

Plenty of companies suffer from rotten management. Keeping eyes and ears open for such value destroyers is the best thing to do – and shareholder activists are supposed to help in doing so.

A wake up call

HDFC is the latest company to be hit by shareholder activism in India, though nothing changed. However, it is a wakeup call for many in the Indian context.

While ousting Parekh would perhaps be a value destroyer for HDFC, but the fact that he is on many boards, attracted the attention of the activists stating that as a Chairperson, he will be unable to do justice to his position in HDFC.

Another activist has complained that some board members have been around for too long, and hence may not be objective in their decision making process. None of these claims can be challenged to be incorrect.

Indian business families would be increasingly under attack, and that too from their own shareholders. Institutional investors, especially those from abroad, are taking more interest in Indian companies, keen to capitalize on what they hope will be a sustained period of economic growth.

It is pertinent to note that institutions now own about 34 percent of listed companies against 23 percent in 2008; with foreign funds now making up 21 per cent of investors, against 13 per cent in 2008.

Unethical behaviors, conglomerate corporate structures and bloated balance sheets are likely to create attractive opportunities for activists seeking to unlock value. Indian entrepreneurs need to take note of these changes.

Suffice to say, the Deepak Parekh episode should not be taken as an isolated instance. The commercial world of Indian business is likely to be surprised by many more activist-moves in the days to come.

DISCLAIMER: The views expressed are solely of the author and ETCFO.com does not necessarily subscribe to it. ETCFO.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.

Robin Banerjee is the Managing Director of one of the oldest and largest Polyvinyl chloride (PVC) film manufacturers - Caprihans India Limited. Prior to the present role, he served as the Group Chief Financial Officer of Suzlon Energy, Executive Director at Essar Steel and Thomas Cook. He had also been earlier the Managing Director & CFO at ArcelorMittal Germany. His career spans various industries like FMCG, steel, auto components, travel and renewable energy. He has held senior leadership positions with responsibilities across global strategy, M&A, finance, treasury, among others. Robin has also written a book on corporate fraud titled: WHO CHEATS AND HOW.

Robin Banerjee is the Managing Director of one of the oldest and largest Polyvinyl chloride (PVC) film manufacturers - Caprihans India Limited. Prior to the present role, he Show more.. served as the Group Chief Financial Officer of Suzlon Energy, Executive Director at Essar Steel and Thomas Cook. He had also been earlier the Managing Director & CFO at ArcelorMittal Germany. His career spans various industries like FMCG, steel, auto components, travel and renewable energy. He has held senior leadership positions with responsibilities across global strategy, M&A, finance, treasury, among others. Robin has also written a book on corporate fraud titled: WHO CHEATS AND HOW.